Fonterra's new China plan

Dairy giant to pick up the premium it has so far left on the table, writes Fran O'Sullivan

Theo Spierings is in Beijing to talk about the big visionary issues. Photo / File

A year ago, Fonterra's Theo Spierings was wooing Shanghai Pengxin over potential multi-regional partnerships to develop milk pools in China. Now it is Spierings' turn to be courted by powerful China Inc: major SOEs like China Investment Corporation (CIC), food conglomerate Cofco and the China Development Bank.

Says Spierings: "Their thinking is 'how can we have a Chinese Fonterra', because they love the New Zealand model.

"We have had good talks with Cofco," he says. "They have a stake in Modern Dairy and Mengniu so they are facing the same issue as us. They have a milk wall on one side and a branded business on the other and no connect or not a good connect." But for Cofco to try to emulate the Fonterra model is no simple matter. Modern Dairy and Mengniu are each listed companies - they are not co-operatives.

"But Fonterra is so important to China we need to connect at that level rather than provincial level," he says. "I was thinking only from a business perspective but I have to think from the country's perspective. So I've had second thoughts, I'll be honest."

He has been invited to meet representatives of the major players in Beijing this week to talk about big visionary issues such as food safety and security. "We have to think big, but we have to be careful it doesn't blow up in our face."

Spierings spells out that the opportunity for Fonterra is definitely upstream. It's in R&D and farming support systems like genetics and IT solutions. "It is the beginning and it is a supporting part. It's not so much downstream - they have a lot."

It's no surprise given these developments that Spierings has charged his team to consider the question - What could we do if there were no constraints on China?

Kelvin Wickham, Fonterra's managing director China, is "working very closely on this issue" with McKinsey's Andrew Grant. But at the operational level Spierings has lifted the pace.

Fonterra will begin selling its own branded infant milk formula in China mid-year and will finally scoop up the valuable premium it left on the table while it stood aside from the Chinese branded baby formula market.

Reuters reported Fonterra had held a stake in Chinese dairy company Sanlu, which collapsed after it was discovered to have added melamine to bulk up its formulas. The tainting scandal destroyed consumer trust in Chinese-made milk products, creating opportunities for foreign manufacturers to grab a greater share of the huge market and command a rich premium for their products.

Baby formula consumption has increased 12-fold to about $12.4 billion in China since 2002 as mothers in an ever-expanding workforce spend less time breastfeeding.

Fonterra's Anmum formula will include products for infants, toddlers and children. The products will be piloted in smaller Chinese cities before being rolled out in Beijing, Shanghai and Guangzhou.

Spierings notes Fonterra has also expanded its Anlene footprint to 14 new cities. The bone health nutritional product "is a big investment that we are driving hard". The food service business has also gone to 21 new cities in the past 12 months,.

Fonterra has confirmed it will build a plant between 2014 and 2016 to process ultra-high temperature milk in China, where it has set up three dairy farms in a hub, with another on the way.

"If I am going to do farm first then factories, it is going to take forever," says Spierings. The Anchor part of the Fonterra portfolio will be linked over time to the milk pools.

"We are coming in from two sides fast and the commitment to China is massive," he says." In the branded space we are investing $40-$50 million in this year over the different projects. It is a huge commitment. But still not fast enough. But we come from way behind."

Spierings is also working on the bigger picture how Fonterra should connect to the bigger players in China like Cofco, CIC and China Development Bank.

"It is our task to connect to China at a national level."

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In 2012

• Dairy exports were 21 times higher than 2000; up 393% since FTA • Wood exports 13 times higher than 2000; up 256% since FTA• Meat exports 15 times higher than 2000; up 329 % since FTA